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Many real estate investors in the UAE automatically think of residential villas or apartments when they consider buying property. However, both at home and abroad, there are a number of alternative subclasses within the real estate sector that a buyer can consider strategic.
Moving away from villas and apartments and broadening the horizons offer investors portfolio diversification and the possibility to enjoy a more hands-off investment. Buyers in the UAE have favoured serviced apartments for several years — a property type offering purchasers a turnkey solution with full fit-out and furnishing often included in the sale price and a regular return through a rental pool. As such, owners don't need to worry about directly managing the property and arranging for tenants as someone else is doing this for them.
Our research at ValuStrat estimates that in Dubai there are currently 60,500 hotel rooms and 23,500 hotel apartments. Here, these types of units have traditionally been available in upmarket locations such as Downtown Dubai and Dubai Marina, but over the past couple of years, developers have launched more affordable offerings in newer areas such as Business Bay and Shaikh Zayed Road and districts close to Dubai World Central and the World Expo 2020 site. While a serviced apartment can be easy to own, buyers need to pay close attention to the rental pool arrangements detailed in the operator's agreement and beware of high fees and limitations on self-usage.
Dubai's booming hospitality sector has also brought attention to hotels as an asset class. With entry prices for whole buildings out of reach for most, except corporations and institutional investors, innovative concepts for the sale of individual rooms have been introduced. Similar to the serviced apartment model, these offer buyers direct hands-free ownership in the city's hospitality sector.
Well-located properties being run by premium operators could prove an attractive investment, though subject to future performance of the sector and the hotel in question. One example is the Viceroy Dubai Palm Jumeirah, where rooms were sold off-plan from Dh1.65 million-Dh1.8 million, with only 20 per cent paid in advance and the remaining amount due upon handover. When completed, the rooms would be leased back to the hotel operator, with generous returns of up to 14 per cent each year quoted by the developer at the project launch.
Research by ValuStrat suggests that even modest real estate investors — with a budget of Dh1 million — can consider acquisition of commercial property such as office and retail units. Offices in areas such as Jumeirah Lakes Towers (JLT) and Business Bay could offer good prospects for rental income with the city's expanding economic base and growing services sector. Expect achievable gross yields from 6-7.5 per cent.
While retail units in the emirate's malls are not available for individual purchase, shops can be bought in Dubai Marina, JLT and Dubai International Financial Centre. Suburban offerings are also available in locations such as Jumeirah Village Circle (JVC) and International City. Retail gross yields in JVC average 9.6 per cent. While landlords of commercial real estate generally enjoy more business-like relationships with their tenants compared to residential investors, their rental income is dependent upon the success of their tenant's business.
Other alternative real estate asset classes include self-storage facilities, student accommodation and retirement villages. Similar to some of the aforementioned models, these investments allow purchase of individual units with income enjoyed by way of a rental pool. While not generally available in this region, these have become increasingly prevalent in Western markets, especially privately provided student accommodation, which has evolved significantly in university towns in the UK.
Private investors interested in real estate can also consider allocating to a Real Estate Investment Trust (REIT) and real estate funds. These investment vehicles offer individuals the opportunity to target professionally managed offerings with specific strategies. Some funds are very broad in their approach and others much more focused.
REITs are listed in stock markets and allow investors to buy and sell shares in any volume whenever they wish, whereas real estate funds are generally promoted by banks, financial institutions and insurance companies. These could have more restrictive entry and exit rules than REITs and the minimum financial allocation could also be higher.
Both REITs and funds provide ordinary investors an opportunity to enter a market they otherwise cannot afford, such as large commercial real estate assets and sectors holding strong future prospects, under the guidance of expert fund managers. They are also available in the UAE. But the disadvantages of these structures over traditional brick-and mortar investments is that they cannot be directly leveraged by way of a mortgage and some of the funds have limited windows for leaving.
Institutional investors, such as banks and pension funds, can also consider assets such as multistorey car parks, private schools and hospitals. While requiring significant amounts of capital outlay, these can provide opportunity for diversification into segments that could offer good returns even during generally slump periods in real estate.
As with all investments, research is key, and as Dubai's property market matures, considering alternative subclasses could offer investors positive returns going forward.
Source: Declan King, Special to Property Weekly